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Friday, 4 July 2008

Global sukuk primary market falls to $11bn in H1

DUBAI: The global Islamic bond primary market which dropped to $10.9bn in the first half of 2008 may recover in the fourth quarter to exceed last year’s figures as credit spreads tighten and investor confidence in local currencies picks up. “We have seen the worst. International debt capital markets are improving. Let’s hope for a very busy fourth quarter,” said Geert Bossuyt, managing director and regional head of Middle East structuring, Global Markets at Deutsche Bank. The global market for sukuk was worth $10.9bn over the past six months compared to $18.26bn in the same period last year, according to Zawya.com data. In the Middle East, a total of $6.25bn worth of sukuk was sold during the first half of this year down from $9.68bn in 2007, the data showed. “A drop of approximately 35% is not very bad if you see the way credit markets have been over the last few quarters,” said Urvil Thacker, associate director, Global Investor Sales at Standard Chartered Bank. Considering the tight conditions in the global credit markets following the subprime mess, the Islamic bond primary market has done fairly well over the last two quarters, he added. The United Arab Emirates topped the list of Middle East countries sourcing sukuk in terms of total volume, which was close to $3.8bn, followed by Saudi Arabia at $1.4bn. In terms of the number of issues, Bahrain lead with 12 issues, out of the total 23 issues sold in the region since the beginning of this year. “Local currency issuance from the region have helped in a big way to get to these numbers,” said Thacker, adding that, “else they could have been much worse off”. More than half the issues sold in the region were structured as Ijarah, or leasing structure. The market is further expected to grow as part of the systemic Middle Eastern growth in long-term conventional debt financing combined with a drive to tap the deep pool of Islamic liquidity. “Unless something else blows out big time, we expect markets to improve over the last quarter,” Standard Chartered’s Thacker said. “Times were such that it was better to have a neutral bias, than to participate and take a hit.” Islamic bonds have not been able to efficiently allocate resources and contribute towards an equitable distribution of wealth envisaged by Islamic economic system. “Profit distribution (mostly guaranteed) on Islamic bonds is invariably not in line with actual profit of the project or enterprise but embedded in a structure linked to a benchmark. Notwithstanding the healthy profit payments that such bonds might pay, guaranteed profit structures may lead to a sub-optimal return for the investor, whose payoff may have been different with real profit sharing”, said A Siddiqi, a GCC-based banker. “Profit derived from the underlying physical assets of sukuk should be paid to bondholders as Islam views them as real partners in real assets,” Siddiqi added. – Zawya Dow Jones